USD/INR falls further on hopes of US-India trade deal
- The Indian Rupee rises to near 87.80 on expectations that the US and India could reach a deal soon.
- US President Trump claims that India would halt buying oil from Russia.
- Fed’s Collins argues in favor of more rate cuts to support the labor market.
The Indian Rupee (INR) extends its Wednesday’s strong recovery move against the US Dollar (USD) on Thursday. The USD/INR pair slides to near 87.80 as the Indian Rupee strengthens on hopes that the United States (US) and India will reach a trade agreement soon.
The speculation for the US-India trade deal has been bolstered by comments from President Donald Trump, in a briefing at the Oval Office on Wednesday, in which he claimed that Indian Prime Minister (PM) Narendra Modi has assured him that New Delhi will stop buying oil from Russia.
“So, I was not happy that India was buying oil, and he (Modi)assured me today that they will not be buying oil from Russia,” Trump said, CNBC reported.
Trade relations between the US and India had been through a rough phase as Washington raised tariffs on imports from New Delhi to 50% for buying Russian oil, criticizing that the money is funding Moscow to continue THE war in Ukraine.
On the domestic front, the minutes of the policy meeting that took place earlier this month showed that Reserve Bank of India (RBI) officials see room for more interest rate cuts due to downside inflation risks. “The benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth," RBI Governor Sanjay Malhotra wrote, Reuters reported.
Daily digest market movers: US Dollar faces pressure due to multiple headwinds
- An extended corrective move in the US Dollar amid firm Federal Reserve (Fed) dovish bets, continued US government shutdown, and escalating US-China trade tensions has also weighed on the USD/INR pair.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its losing streak for the third day on Thursday and trades 0.15% lower to near 98.50 during the Asian session.
- Traders remain increasingly confident that the Fed will extend its monetary easing campaign, which it started in September, due to downside labor market risks. According to the CME FedWatch tool, traders see a 94.6% that the Fed will reduce interest rates by 50 basis points (bps) to 3.50%-3.75% in the remaining year.
- On Tuesday, Boston Fed President Susan Collins also supported the need for more interest rate cuts in the wake of cooling job market conditions. With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market,”
- Meanwhile, the US government has entered into its third week of shutdown as Democrats still deny support for the short-term funding bill at the US Senate. On Wednesday, US Treasury Secretary Scott Bessent stated that the federal shutdown may cost as much as $15 billion a week in lost output, Reuters reported.
- On the global front, trade tensions between the US and China are likely to escalate as President Trump plans to pressure China to halt buying oil from Russia. Trump signaled on Wednesday that he will persuade Beijing to stop their Russian oil purchase, aiming to cease funding to Moscow to stop the war in Ukraine.
- There have been trade frictions between the two nations for a week since Washington announced 100% additional tariffs on imports from Beijing in response to export controls on rare earths and magnets.
Technical Analysis: USD/INR stays below 20-day EMA
The Indian Rupee extends its upside to near 87.80 against the US Dollar on Thursday. The USD/INR pair faces a sharp selling pressure after a breakdown of the three-week-long consolidation formed in a range between 88.75 and 89.10.
The near-term trend of the pair has become uncertain as it has dropped below the 20-day Exponential Moving Average (EMA), which is around 88.58.
The 14-day Relative Strength Index (RSI) falls below 40.00. A fresh bearish momentum if the RSI holds below that level.
Looking down, the August 21 low of 87.07 will act as key support for the pair. On the upside, the 20-day EMA will be a key barrier.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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